The effect of monetary policy on inflation in Kenya

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Over the years central Bank of Kenya (CBK) has utilized monetary policies to bring about stabilization on inflation and output by use of reserve money simultaneously and Central bank rates (CBR). It is however very important that a central bank should respond to the problem of monetary policy transmission mechanism. With respect to monetary policy shocks a monetary authority or central banks needs to know the elasticity of price rises in order to decide the amount by which value of the policy instrument should change so as to get hold of a preferred amount of change in inflation. The monetary authority should also be familiar with the standard amount of time taken for the full impact of a monetary policy shock on inflation to become visible. In cooperation with information of the suppleness, this it possible for the central bank to take timely measured policy actions aimed at managing inflation.
The objective of this project was to establish the effects of monetary policies on inflation in the economy. To achieve this objective, a descriptive research design that covers a time series of five (5) years was adopted. The population of interest in this study consisted of monetary policy aggregates used by central bank over the study period. The study used secondary data obtained from the KNBS for the years 2009-2013.The variables of interest i.e. inflation rates, reserve ratios, CBR rates were entered into statistical package for social sciences and analyzed to examine their relationship and hence achieve the research objective.
It was noted that there is a relationship between monetary policies and inflation. Evidence from the statistics showed that the coefficients of central bank rate are positive while that of reserve ratio is negative. This implies that there is a negative relationship between inflation rate and reserve ratio requirement while that of central bank rate is positive. The relationship can be used to formulate a targeted policy towards attaining acceptable level of inflation set at 5% in Kenya.
The study recommends that in order for the country to realize a stable rate of inflation the central bank should focus on Reserve ratio requirement and develop best practices towards its full implementation. However the use of multiple monetary policy tools is therefore necessary so as to eliminate the bias related to period under consideration.